Organic Produce Corporation has 8.0 million shares of common stock outstanding,

Question

Organic Produce Corporation has 8.0 million shares of common stock outstanding, 550,000 shares of 7.00 percent preferred stock outstanding, and 180,000 of 8.2 percent semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $64.50 per share and has a beta of 1.25, the preferred stock currently sells for $107.50 per share, and the bonds have 15 years to maturity and sell for 93.5 percent of par. The market risk premium is 6.80 percent, T-bills are yielding 5.50 percent, and the firm

Explanation / Answer

Cost of equity= 5.5+(1.25x6.8)= 14% Cost of prefered stock= 7% Cost of debt= 8.2/2= 4.1% M.V of equity= 8000000x64.5= $51600000 M.V of prefered stock= 550000x107.5= $59125000 M.v of debt= 93.5%x1000x18000= $16830000 Therefore total capital= 51600000+59125000+16830000= $127555000 Weight of equity= 51600000/127555000= .4045 Weight of Preferred stk= 59125000/127555000= .4635 Weight of debt= 16830000/127555000= .1319 Weighted average cost of capital = (14x.4045)+(7x.4635)+(4.1(1-.34)x.1319) = 9.26%

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